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Boogich A Quick Take On Top KingWin Ltd Top KingWin Ltd (TCJH) has filed to raise $13.5 million in an IPO of its Class A ordinary shares, according to an F-1 registration statement. The firm provides financial and consulting services to small and medium-sized businesses in China. Given the company’s regulatory risks within China, dropping revenue and thin capitalization, I’ll pass on the IPO. Top KingWin Overview Guangzhou, China-based Top KingWin Ltd was founded to provide a range of consulting and advisory services to SMEs in China. Management is headed by Founder, Chairman and CEO Ruilin Xu, who has been with the firm since 2020 and previously has held various positions within the private equity, M&A and consulting fields. The company’s primary offerings include: Corporate training – 7% of revenue Consulting – 23% Advisory and transaction services – 70% As of September 30, 2022, Top KingWin has booked fair market value investment of $1.1 million in equity and debt from investors including Ruilin Xu, Fern Win Talent, Tianchengyihao Holding, Astra Capital and Huang Fei Holding. Top KingWin – Client Acquisition The firm pursues client relationships with entrepreneurs and executives of small and medium-sized businesses in China. Management is focused on Guangzhou and has plans to expand geographically to other Tier 1 cities within China. Selling expenses as a percentage of total revenue have risen as revenues have decreased, as the figures below indicate: Selling Expenses vs. Revenue Period Percentage Nine Mos. Ended September 30, 2022 24.0% 2021 15.6% 2020 20.9% Click to enlarge (Source – SEC) The Selling efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling spend, fell to negative (0.7x) in the most recent reporting period, as shown in the table below: Selling Efficiency Rate Period Multiple Nine Mos. Ended September 30, 2022 -0.7 2021 5.1 Click to enlarge (Source – SEC) Top KingWin’s Market & Competition According to a 2022 market research report by Proficient Market Insights, the global market for consulting services was an estimated $283.6 billion in 2021 and is expected to reach $358.5 billion by 2027. This represents a forecast CAGR of 3.99% from 2022 to 2027. The main drivers for this expected growth are the need for companies to continue optimizing their operations, growing supply chain volatility and changing market dynamics at a greater rate of change. Also, Source Global Research indicates that a large percentage of consulting clients are in the financials, manufacturing, TMT and retail sectors. The consulting market for SMEs in China is highly fragmented and there are no firms with a high market share, so the company faces competition from numerous small competitors. Top KingWin Ltd Financial Performance The company’s recent financial results can be summarized as follows: Contracting topline revenue Reduced gross profit and variable gross margin A swing to operating loss Significant cash used in operations Below are relevant financial results derived from the firm’s registration statement: Total Revenue Period Total Revenue % Variance vs. Prior Nine Mos. Ended September 30, 2022 $ 2,801,724 -15.0% 2021 $ 6,294,667 371.9% 2020 $ 1,333,930 Gross Profit (Loss) Period Gross Profit (Loss) % Variance vs. Prior Nine Mos. Ended September 30, 2022 $ 2,136,335 -15.6% 2021 $ 4,937,869 465.7% 2020 $ 872,892 Gross Margin Period Gross Margin Nine Mos. Ended September 30, 2022 76.25% 2021 78.45% 2020 65.44% Operating Profit (Loss) Period Operating Profit (Loss) Operating Margin Nine Mos. Ended September 30, 2022 $ (52,051) -1.9% 2021 $ 3,043,222 48.3% 2020 $ 379,858 28.5% Comprehensive Income (Loss) Period Comprehensive Income (Loss) Net Margin Nine Mos. Ended September 30, 2022 $ (414,251) -14.8% 2021 $ 2,347,702 83.8% 2020 $ 365,865 13.1% Cash Flow From Operations Period Cash Flow From Operations Nine Mos. Ended September 30, 2022 $ (1,224,659) 2021 $ 3,774,372 2020 $ 184,220 (Glossary Of Terms) Click to enlarge (Source – SEC) As of September 30, 2022, Top KingWin had $2.6 million in cash and $2.4 million in total liabilities. Free cash flow during the twelve months ended September 30, 2022, was $209,088. Top KingWin Ltd IPO Details Top KingWin intends to raise $13.5 million in gross proceeds from an IPO of its Class A ordinary shares, offering 3 million shares at a proposed midpoint price of $4.50 per share. Class A ordinary shareholders will be entitled to one vote per share and the sole Class B shareholder, founder and Chairman Xu, will receive twenty votes per share. The S&P 500 Index no longer admits firms with multiple classes of stock into its index. No existing shareholders have indicated an interest in purchasing shares at the IPO price. Assuming a successful IPO, the company’s enterprise value at IPO would approximate $53.5 million, excluding the effects of underwriter over-allotment options. The float to outstanding shares ratio (excluding underwriter over-allotments) will be approximately 20.0%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility. Management says it will use the net proceeds from the IPO as follows: We plan to use the net proceeds we receive from this offering for [i] personnel training and recruitment of qualified personnel; [ii] system improvement, building online platforms for future online courses; [iii] enhancement of brand recognition through multi-channel marketing; [iv] mergers and acquisitions within the industry; and [v] general corporate purposes and working capital, including potential strategic investments and acquisitions. (Source – SEC) Management’s presentation of the company roadshow is not available. Regarding outstanding legal proceedings, management says the firm is not currently involved in any legal proceeding that would have a material adverse effect on its financial condition or operations. The sole listed bookrunner of the IPO is Univest Securities. Valuation Metrics For Top KingWin Below is a table of relevant capitalization and valuation figures for the company: Measure [TTM] Amount Market Capitalization at IPO $67,500,000 Enterprise Value $53,445,197 Price / Sales 11.63 EV / Revenue 9.21 EV / EBITDA 38.90 Earnings Per Share $0.05 Operating Margin 23.68% Net Margin 12.30% Float To Outstanding Shares Ratio 20.00% Proposed IPO Midpoint Price per Share $4.50 Net Free Cash Flow $209,088 Free Cash Flow Yield Per Share 0.31% CapEx Ratio 2.74 Revenue Growth Rate -14.95% (Glossary Of Terms) Click to enlarge (Source – SEC) Commentary About Top KingWin’s IPO TCJH is seeking U.S. public capital market investment to fund its general corporate growth plans. The company’s financials have generated decreasing topline revenue, lowered gross profit and variable gross margin, recent operating loss and substantial cash used in operations. Free cash flow for the twelve months ended September 30, 2022, was $209,088. Selling expenses as a percentage of total revenue have risen as revenue has decreased; its Selling efficiency multiple fell to negative (0.7x) in the most recent reporting period. The firm currently plans to pay no dividends and to retain any future earnings for reinvestment back into the firm’s growth initiatives. The market opportunity for providing consulting services in China is substantial but highly fragmented, with low barriers to entry. Like other firms with Chinese operations seeking to tap U.S. markets, the firm operates within a WFOE structure or Wholly Foreign Owned Entity. U.S. investors would only have an interest in an offshore firm with interests in operating subsidiaries, some of which may be located in the PRC. Additionally, restrictions on the transfer of funds between subsidiaries within China may exist. The recent Chinese government crackdown on IPO company candidates combined with added reporting and disclosure requirements from the U.S. has put a serious damper on Chinese or related IPOs resulting in generally poor post-IPO performance. Also, a potentially significant risk to the company’s outlook is the uncertain future status of Chinese company stocks in relation to the U.S. HFCA act, which requires delisting if the firm’s auditors do not make their working papers available for audit by the PCAOB. Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing or unpredictable Chinese regulatory rulings that may affect such companies and U.S. stock listings. Additionally, post-IPO communications from the management of smaller Chinese companies that have become public in the U.S. has been spotty and perfunctory, indicating a lack of interest in shareholder communication, only providing the bare minimum required by the SEC and a generally inadequate approach to keeping shareholders up-to-date about management’s priorities. Univest Securities is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (50.6%) since their IPO. This is a bottom-tier performance for all major underwriters during the period. As for valuation, management is asking investors to pay an Enterprise Value/Revenue multiple of approximately 9.2x on declining revenue from a small base. Given the firm’s regulatory risks within China, dropping revenue and thin capitalization, I’ll pass on the IPO. Expected IPO Pricing Date: To be announced.

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